Are risks worth the rewards when nonprofits act like venture capitalists?

Robert Beall, president of the Bethesda-based Cystic Fibrosis Foundation, led the group’s decision in the late 1990s to invest in a small California biotechnology firm. (Amanda Voisard for The Washington Post)

By the late 1990s, the Bethesda-based Cystic Fibrosis Foundation had spent decades searching for ways to alter the course of the deadly lung disease. Researchers had identified the genetic cause of the condition a decade earlier, and incremental improvements in care meant that many patients were living into their 30s.

But frustrated that no game-changing treatments were in sight, the group’s leaders in 1999 placed what many considered a risky bet, deciding to invest millions of dollars in a small California biotech firm. Robert J. Beall, the foundation’s president, believed that putting money into drug companies directly, rather than merely making grants to academic investigators, might persuade the industry to focus on the disease and turn research into real-world treatments.

That initial bet, which over time grew into a $150 million investment, has paid off in a big way. It led to the approval in 2012 of a breakthrough drug — the first that treats the underlying cause of cystic fibrosis rather than the symptoms, in a small subset of patients. On Thursday came another big win: The Food and Drug Administration approved a second drug for the group also helped fund development; that drug eventually could aid roughly half of the 30,000 cystic fibrosis patients in the United States.

And last fall, the CF Foundation sold its rights to future royalties from the drugs for $3.3 billion, the largest windfall of its kind for a charitable organization.

Beall greets guests during Teen Advocacy Day on Capitol Hill on June 25. In addition to funding research and drug development related to cystic fibrosis, the group also lobbies lawmakers on behalf of patients and accredits dozens of specialized care centers around the country. (Amanda Voisard for The Washington Post)

The pioneering success of Beall and the Cystic Fibrosis Foundation in the practice of “venture philanthropy” is prompting a growing number of nonprofit groups to explore whether they, too, might be able to benefit their patients, and bottom lines, by investing in similar ways.

Dozens of organizations, from the Michael J. Fox Foundation to the Multiple Myeloma Research Foundation to the National Multiple Sclerosis Society, have embraced the approach over the past decade. Typically, though not always, groups take an equity stake in a company or negotiate a percentage of future royalties for approved drugs in exchange for their investment. They also have shared their scientific expertise and patient registries, which can be invaluable for companies conducting clinical trials of new medicines.

Venture philanthropy has its skeptics, who argue that patient groups risk harming their reputations and their bank accounts by forming partnerships with the drug industry. Some experts worry that the relationships create inherent conflicts of interest and that nonprofits could allow financial motives to undermine their primary mission of putting patients first.

For instance, the initial drug that the CF Foundation helped fund, Kalydeco, costs more than $300,000 a year per patient. Orkambi, the drug approved Thursday, will cost $259,000 a year. Critics say such price tags inevitably will place burdens on patients, even as they increased the value of the CF Foundation’s recent royalty deal and create significant revenues for Vertex Pharmaceuticals, the company that developed both drugs. A group of specialists wrote to Vertex after Kalydeco’s approval, calling the price “unconscionable.”

“There’s a reason why corporate America exists, and there’s a reason why philanthropic organizations exist,” said David Cornfield, a professor of pediatric pulmonary medicine at Stanford University. “When that distinction becomes invisible, it becomes very difficult to know where philanthropy ends and venture capital begins.”

Proponents counter that venture philanthropy has helped to fill a persistent gap that exists between basic academic research funded largely by the government and later-stage clinical trials typically funded by large pharmaceutical companies — a gap known as the “valley of death.”

“It’s where great ideas, unfortunately, go to die,” said Francis Collins, director of the National Institutes of Health, who, as a researcher at the University of Michigan, helped identify the gene for cystic fibrosis in 1989. “If foundations can pitch in there, that’s great. . . . We need as many models to get there as possible.”

The Leukemia & Lymphoma Society created a “therapy acceleration program” in 2007, in part after realizing that even the most promising academic research it had funded too often went nowhere. “An academic investigator would write a paper, and nothing would happen,” said the group’s president, Louis J. DeGennaro. “[The projects] basically languished on the shelf.”

In recent years, the group has put about $40 million into a variety of companies, trying to help them clear hurdles in the drug-development process. It also has offered medical expertise and the ability to help companies locate potential patients for clinical trials.

“We do as deep a due diligence as any venture capital firm might,” DeGennaro said. “When we partner with a company, it’s not a grant, it’s a business alliance. There’s a contract with timelines and milestones. We’re paying for performance.”

JDRF, formerly known as the Juvenile Diabetes Research Foundation, now spends roughly 20 percent of its money each year investing in corporations developing treatments for the autoimmune disease.

“We ask the question: Will our funding lead to something happening that otherwise wouldn’t happen?” said Derek Rapp, the group’s president. “At the end of the day, that’s our job as an organization — to accelerate therapies that can have a tremendous difference for everyone living with this disease.”

Still, venture philanthropy is not always practical — or even realistic. Many organizations don’t have the money to risk significant sums on drug development projects that are more likely to fail than succeed. DeGennaro said he also reminds nonprofits that come seeking advice that the CF Foundation took its leap only after researchers identified the gene behind the condition.

“They no longer had to solve the science problem. . . . What they needed was drugs,” he said. “If you need to solve a science problem, venture philanthropy is probably not right for you.”

For companies, a kind of partnership that once seemed strange is becoming more common. Paul Negulescu was director of cell biology for Aurora Biosciences in the late 1990s when the CF Foundation asked the company to begin screening for drug compounds that might treat the genetic cause of cystic fibrosis.

“It was an unusual, unprecedented request,” recalled Negulescu, now senior vice president of research at Vertex, which later acquired Aurora. “We were used to working with [larger] pharmaceutical companies. . . . This was basically a patient group saying, ‘Can you help us?’ ”

He said that logistical and financial support from the foundation over the years made the company’s scientists feel invested and set it on a course it wouldn’t have pursued otherwise. “The scope of the goal definitely motivated people here,” Negulescu said. “For us, as a very small biotech, it put us on the path of drug discovery.”

People with cystic fibrosis frequently experience digestive problems and a buildup of sticky mucus in their lungs that can lead to serious infections. Patients often die of respiratory failure in their 30s or 40s, although some live much longer. As recently as the 1950s, few children diagnosed with the disease lived long enough to attend elementary school.

Kalydeco, the 2012 breakthrough drug, is approved to treat only about 2,000 patients in the United States who have specific genetic mutations. Orkambi, which combines Kalydeco and another compound called lumacaftor, is targeted toward patients who have two copies of the most common mutation, called F508del.

Nearly half of the estimated 30,000 cystic fibrosis patients in the United States fall into that category, though Thursday’s approval of Orkambi applies only to the 8,500 or so who are 12 and older. Vertex has been testing the drug in younger patients, in hopes of eventually broadening its use.

Emily Schaller, a 33-year-old cystic fibrosis patient from Detroit, said she is grateful that the CF Foundation took its long-ago gamble that led to the development of the drugs.

“I just don’t think [drug companies] would spend time and money on small groups like cystic fibrosis unless there was an incentive,” said Schaller, who has been taking Kalydeco for several years and now runs half-marathons and operates her own nonprofit group. “I’m alive, and I’ve never been more alive because of this drug. . . . I’m now starting a retirement fund, which is something I never thought that I would need.”

Beall, now in his fourth decade at the CF Foundation and one of the top-earning chief executives in the nonprofit world, is aware of the concerns and criticism prompted by the landmark $3.3 billion deal last fall. Among them: that such a financial bonanza might discourage future contributions from supporters; that the foundation should be sharing its billions more directly with patients; that the group should have pushed harder to lower the price of Kalydeco and subsequent drugs.

Beall insists that fundraising has remained steady. He said using the proceeds to pay directly for patient care would be shortsighted and that the group already supports patient assistance programs and accredited care centers around the country. He agrees that the cost of Kalydeco, which he believes could double some patients’ life expectancy, is far too high. But he said his group had no say in the price, and that last year’s royalty deal will allow it to fund competing treatments in the pipeline that he hopes will eventually drive down costs.

Beall said the recent deal also has allowed the foundation to “supercharge” the search for its ultimate goal: a cure for all patients. “Now we can start thinking about things that are out 20 or 30 years,” he said.

Some bets don’t pay off. The CF Foundation has invested nearly $450 million in several dozen companies over time as part of its venture philanthropy efforts. Some projects have ended in disappointment, and others probably will, too, Beall said. But to him, the risks are worth the potential rewards.

“Venture philanthropy is not for the faint of heart,” he said. “There are going to be failures. . . . But you have to take the shots on goal.”

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Brady DennisBrady Dennis is a national reporter for The Washington Post, focusing on the environment and public health issues. He previously spent years covering the nation’s economy. Dennis was a finalist for the 2009 Pulitzer Prize for a series of explanatory stories about the global financial crisis. Follow

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